Sweden, known for its stable economy, robust financial system, and stringent regulatory framework, has experienced occasional bank failures that have left international creditors concerned about their investments. The Swedish banking system is primarily governed by the Banking and Financing Business Act (2004:297), the Credit Institutions Act (2004:296), and the Swedish Financial Supervisory Authority (SFSA) regulations. In the event of a bank failure, the Resolution Act (2016:1016) and the Deposit Insurance Act (1995:1571) play a significant role in protecting depositors and ensuring an orderly resolution process.
Prominent Swedish banks such as Swedbank and SEB have been subjected to massive fines for misconduct, including money laundering and inadequate anti-money laundering (AML) procedures. Swedbank received a fine of approximately 4 billion SEK in 2020, while SEB was fined 1 billion SEK in 2021. Despite the severity of the wrongdoings, these banks were not shut down due to their systemic importance and the potential adverse effects on the national and international financial systems. Additionally, they demonstrated cooperation with regulators and took corrective measures to rectify their shortcomings.
Bank Failure in Sweden
In Sweden, a bank failure is defined as a situation where a bank becomes unable to meet its obligations or is likely to be unable to meet them in the near future. This definition encompasses insolvency, liquidity issues, and severe capital inadequacy. Bank failure determination in Sweden is a process conducted by the SFSA, in consultation with the European Central Bank (ECB) for banks under the Single Supervisory Mechanism (SSM), or the European Banking Authority (EBA) for non-SSM banks. The determination is based on the following factors:
- Capital adequacy ratio breaches
- Liquidity shortfalls
- Failure to comply with regulatory requirements
- Substantial operational or management issues
The SFSA is the primary bank supervisor in Sweden, responsible for determining if a bank has failed or is likely to fail. Their legal mandate includes assessing banks’ compliance with regulatory requirements, monitoring financial stability, and ensuring the effectiveness of risk management and internal control systems.
Following a bank failure determination, the resolution process is initiated under the Resolution Act. Common reasons for bank failures in Sweden include: insufficient capital buffers; poor risk management practices; fraud and misconduct; market and credit risk exposures; and macroeconomic shocks.
Bank Supervision and Resolution Planning
Bank supervision in Sweden involves the SFSA’s ongoing monitoring of banks’ financial stability, compliance, risk management, and governance. Resolution planning, on the other hand, entails the development of recovery and resolution plans to preserve the critical functions of banks during financial distress. This process ensures the continuation of the organization and minimizes the impact on the financial system.
When a bank fails, the Swedish National Debt Office (SNDO) assumes the role of the resolution authority, with the following steps in place:
- Determine the appropriate resolution tools and actions
- Ensure the continuity of critical functions
- Maintain financial stability and minimize public costs
- Safeguard the interests of depositors and other stakeholders
- Coordinate with other domestic and international authorities
The resolution authority in Sweden has several options to address a failed bank, including sale of the business (transferring assets, liabilities, and operations to a third-party buyer), bridge bank (temporarily transferring the bank’s essential functions to a publicly owned entity until a long-term solution is found), asset separation (isolating impaired or non-performing assets in a separate entity to facilitate their orderly disposal), and bail-in (recapitalizing the bank by writing down or converting liabilities to equity).
Protecting Deposits and Creditor Interests
In Sweden, the Deposit Insurance Scheme, governed by the Deposit Insurance Act, protects deposits up to 950,000 SEK (approximately €100,000) per depositor and per institution. The scheme covers banks, credit institutions, and investment firms authorized by the SFSA.
The Swedish resolution framework ensures the orderly exit of non-viable firms by implementing resolution tools and processes that minimize disruptions to the financial system and protect the interests of depositors and other stakeholders.
Bank Liquidation in Sweden
In case the resolution authority deems that a bank’s failure does not pose a systemic threat, it may initiate a liquidation process under the Swedish Companies Act (2005:551). The liquidation process involves the appointment of a liquidator, realization of the bank’s assets, and distribution of proceeds to creditors based on their priority.
Despite the relative stability of the Swedish banking system, bank failures can still occur and pose a risk to international creditors. Understanding Sweden’s banking laws, the bank failure determination process, resolution planning, and creditor protection measures is crucial for safeguarding investments and minimizing losses in the event of a bank failure. By staying informed and proactive, account holders can navigate the complexities of statutory administration, deposit insurance, and bank liquidation, ensuring the best possible outcome in a challenging situation.